CTS Corp (CTS) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTS Corporation third-quarter 2007 earnings call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Mitch Walorski, Director of Planning and Investor Relations. Please go ahead.

Thank you, Lavida. I'm Mitch Walorski, Director of Planning and Investor Relations, and I will host the CTS Corporation's third-quarter 2007 earnings conference call. Thank you for joining us today.

Participating from the Company today are Vinod Khilnani, President and CEO; Matt Long, Interim Chief Financial Officer and Treasurer; and Tom Kroll, Vice President and Controller.

Before beginning the business discussion, I would like to remind our listeners that the conference call contains forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information regarding these risks and uncertainties was set forth in last evening's press release and more information can be found in the Company's SEC filings. To the extent that today's discussion refers to any non-GAAP measures relative to Regulation G, the required explanations and reconciliation are available on our website in the Investor Relations section. I will now turn the discussion over to our CEO, Vinod Khilnani.

Thanks, Mitch and good morning, everyone. Last evening, we released our third-quarter 2007 financial results.

Overall, despite a challenging economic environment, sales, growth and operating margins, earnings per share, and free cash flow all considerably improved in the third quarter of 2007 from the same quarter last year. Sales at $174.8 million went up 5.5% over the third quarter of last year, driven by sales growth in our automotive sensors and actuators, infrastructure applications and electronic manufacturing services. Diluted earnings per share were $0.20 compared to $0.16 in the third quarter of 2006. On a segment basis, component incentive sales were $68.8 million, up 6.1% from the third quarter of last year. Automotive product sales were up 8%, primarily driven by double-digit growth of our automotive sales in the Asia-Pacific region. Sales of electronic components were up 3.4%, driven again by double-digit increase and sales for communication infrastructure applications. EMS sales in the quarter were $106 million, up 5.1% over third quarter of last year despite the expected 20% decline in sales to HP. It. Our dependence on Hewlett-Packard sales continues to be reduced as sales to this customer have fallen to less than 17% of total Company sales in the third quarter compared to 22% in the same quarter last year.

As the Company has noted in its past conference calls, this decline reflects changing product demand patterns as several of the products we manufacture for HP are approaching end of life. That, combined with our focus on defense and aerospace, industrial, and medical markets, continues to shift our product mix within our EMS segment. A 19% growth in the non-HP EMS sales again were able to more than offset the HP decline in the third quarter.

In summary, despite a weaker economic environment, CTS recorded a year-over-year increase of 5.5% in its total sales with strong double-digit growth continuing in target markets. Earnings per share in the quarter were $0.20 diluted, up 25% from the third quarter last year. Gross and operating margins improved despite a 5 to 7% drop in the value of the U.S. dollar against some key currencies. A strong quarterly operating and free cash flow were also bright spots in the third quarter.

Other highlights of the quarter included three additional pedal program awards from a leading Japanese OEM for the model year 2010. Four new customers were added to our EMS segment. Overall business development activity was promising in all of our businesses, including electronic components with 47 new design wins for capture, an increase of 12% from the same quarter last year. These infrastructure design wins were in Wi-Fi, WiMAX, 3G wireless and telematics applications. We have also increased our M&A-related activities and are focusing on small bolt-on acquisitions with 15 to $20 million revenue opportunities to help supplement our organic growth.

From an operational point of view, we now have 14 sensor lines up and running in the Czech Republic with only four more to go. Three of the remaining four lines are being transferred in the fourth quarter and the final line will be transferred in the first quarter of 2008. All totaled, sales from our Czech Republic facility will more than double from an estimated level of approximately $8 million in 2007. Our new Zhongshan, China automotive plant in southern China had a smooth startup and now has five production lines running. And we have plans to introduce three new pedal lines in China next year and are expected to double their volumes from this year.

One of the key initiatives in the quarter was establishment of a cross business executive leadership team to collaborate and jointly pursue business development opportunities and further utilize shared services between our businesses. We believe we have additional untapped synergistic opportunities between our businesses to further utilize our international footprint, to make us more competitive in an increasingly global economy.

Although third-quarter sales and earnings were essentially in line with our expectations, looking forward to the rest of the year, we are seeing signs of weakening in our sensor and component segment. Weekend North and South American sensors and actuator demand due to OEM plant shutdowns and inventory reductions are expected to lower our fourth-quarter sensor sales by approximately 2 to $3 million, which along with a weaker U.S. dollar, are impacting earnings per share by approximately $0.03 per share.

North American passenger vehicle inventories, which ended the third quarter at 59 days, are projected to improve and finish 2007 around mid 50s, which should bring back the first-quarter 2008 sales to normal levels again. In addition, push-outs of certain electronic component projects and weaker than expected volumes from certain telecom OEMs, specifically in WiMAX and 3G deployment, are also causing our sales to be softer in the fourth quarter. Due to these short-term factors, we lowered or full-year 2007 diluted earnings per share guidance to a range of $0.65 to $0.68 with annual sales growth of 4 to 5%.

Looking beyond the fourth quarter of 2007, we continue to see growth from new products and new customers. Earnings should benefit not only from increased operations and low-cost structure locations like Czech Republic and Zhongshan, but also because some unusual items which affected us adversely in 2007, like investigation costs and CEO transition, are behind us.

Now I will turn the meeting over to Matt Long, our Interim CFO, to discuss our financial results in more detail.

Thanks, Vinod, and good morning.

We were pleased to report the third-quarter earnings last evening, which reflected increased sales, strong earnings per share and free cash flow. Third-quarter 2007 gross margins as a percent of sales were 19.3%, up from 17.6% in the same quarter last year. The gross margin improvement seen in the third quarter was driven by higher volumes and improved mix while the third quarter of 2006 was impacted by two automotive product launches that experienced increased costs.

SG&A and R&D expenses were 13.7% of sales in the third quarter, an improvement from 14.8% sequentially from the second quarter, but still 1.6 percentage points higher than third quarter last year. Third quarter 2006 benefited from a $1.3 million gain on the sale of assets.

Interest and other expenses in the third quarter were approximately $300,000 better than the year, primarily due to interest income as we've increased our case positions from approximately $29.7 million at the end of the third quarter last year to $45 million this year.

The effective tax rate for the quarter remained unchanged at 21%. This compares to an effective tax rate of 23.2% for the year-ago quarter.

From the balance sheet perspective, it was an excellent quarter. Our controllable working capital as a percentage of annual sales at 13% improved from 13.2% last year and 14.4% sequentially from the previous quarter. Receivable days improved to a record low of 49 days. Inventory turns of 8.2, although still not as good as 8.8% from last year showed an improvement from 7.8 turns second quarter 2007. As stated in last night's press release, CTS purchased approximately 350,000 shares of its stock during the quarter, leading just under $1.7 million shares remaining of the 2 million share buyback authorization.

Free cash flow for the quarter was strong at $12.7 million compared to $5.9 million in the third quarter of 2006. Capital expenditures for the quarter were $3 million, which was lower than third quarter 2006 at $5.2 million.

We are increasing our free cash flow guidance to be approximately 27 to $29 million as a result of reducing capital expenditures to a range of 18 to $21 million for the full year 2007.

Debt to capital ratio further came down to 15.8% from 16.9% at the end of the third quarter last year.

And with that, we will open up the call to your questions.

(OPERATOR INSTRUCTIONS) John Franzreb, Sidoti Corporation.

First question is regarding the acquisition comments you made, Vinod, in the beginning. Could you talk a little bit about which side of the business you will be looking to make those acquisitions in?

John, as you know, we have said in the past that we are open to acquisitions in both of our segments, so we are continuing to look at both the segments. We are currently looking at opportunities, two in electric components and one in EMS area, focused on military and aerospace segment. So we continue to look at them, and as you know, it's very hard to predict which ones or when we will be able to complete one. But the current ones in the pipeline are two in the electronic components and one in EMS.

And are they all about the same size in revenue or is there a significant difference?

Not significant difference. They are all in the 15 to $25 million size.

Okay. You also in your prepared remarks mentioned you are exploring additional synergies within CTS Corp. Could you kind of elaborate what kind of synergy opportunities you see within the firm and should we be expecting further restructurings as we progress through 2008?

As you know, we are always looking for opportunities to run our businesses more efficiently. The areas we are specifically looking at which we believe can give us synergistic savings or make sense to drive in a consistent manner from operations point of view, quality initiatives like Six Sigma or some purchasing and supply chain initiatives, we think it can be combined to some extent and driven from a functional excellence point of view, from a corporate point of view and [stop] doing it at different places in the Company.

From a top-line point of view, we are looking at and we have already done some work in that area. We have some customers which buy product from both of our segments, from a component point of view and EMS point of view. And we are focusing on those customers and approaching them in a joint combined CTS manner instead of approaching them from each of our businesses. We already had one very successful meeting with a large OEM and we actually visited that OEM with a joint EMS and components team for the first time and had a very, very positive reaction from them.

Okay, great. Should we be expecting any one-time costs associated with any of these actions?

We are continuously looking at opportunities for doing that and we will always be open to things like that if we believe that the payback is very, very reasonable and it makes the Company more efficient.

Okay. One last question. You talk about the signs of weakening in the sensors and the 2 to $3 million hit in the coming quarter. How much of that pullback in the revenue line is auto related?

That comment I made was all auto related. It was all sensors and actuators.

And that's all -- that 2 to $3 million is entirely auto?

Yes. That is all automotive related.

Excellent. Thank you very much, Vinod.

Kevin Kessel, Bear Stearns.

So I guess my question is when you are mentioning the wireless infrastructure weakness, Vinod, and the delays and so on, just remind us here, my recollection is more of the work that you are doing there is first of all it's in China and it's also focused on the market in China. Is that right?

No, I think it's pretty global. When we talk about wireless infrastructure, we're either talking about infrastructure filters kind of product with WiMAX application, which is pretty broad, or we're talking about infrastructure frequency kind of a product, where also the market is pretty broad, you know, applications around CDMA base stations, as one example. So Asia is a key driver of growth, but frankly, our projects are pretty global.

Okay. So maybe we're not -- right now, you are referring to more of the components side, the filters and --?

Yes, I'm actually primarily referring to components side.

And I'm thinking actually that the larger piece, is it still not EMS, with the infrastructure that you are building there for -- maybe they are still your second largest customer; I'm not sure.

Yes, and they are -- the comment wasn't really geared towards EMS because as a segment, whatever weakness we see there is more than offset by new business we are getting in the focused areas, like industrial and military and aerospace.

Okay, that makes sense, but just I guess the question then is, is the weakness you are seeing in wireless infrastructure in your components business also affecting your EMS business? I understand that EMS could offset it with other end market strength.

To a smaller extent in EMS also, yes.

Okay, so the economic uncertainty then that you guys referred to in your press release, is there any way to get more specific on that or is it just general?

I think it's general. On the automotive sensor side, I think you have seen a couple of large OEMs in North America talking about temporarily idling some of their facilities and adjusting their inventories, so that's a short-term impact we're seeing. From electronic components point of view, we have seen some push-out of large deployments of WiMAX and some delays from fourth quarter to early next year. So I believe it's related to general economic conditions.

Okay. And how recent would you say some of these things started to appear? Were they evident even in the last quarter or is it more like it's -- it's just come to notice now?

You know, we saw some of it in September time frame, but they became a little bit more pronounced in October -- early October. I would say September, October time frame.

Okay. And then the other thing that you have here is, you mentioned Hewlett Packard at I think you said at 17% of your sales in the quarter down from 22 last year. And I think it's well understood here that there's a lot of products that they have that are going to go end of life and as a result, that exposure will shrink to the existing base of products you have. But what is the outlook here in terms of -- you know, it is your biggest customer still. What is the outlook in terms of winning new awards with them to do EMS assembly for other products that they might have in the future? Or is it something that you think over time that the relationship will just wind itself down and you guys will replace it with other things like on the defense and auto and medical side?

We are bidding on new business with HP. And the outcome of that will determine more clearly where we go. We are also trying to clarify that some of the products which we believe are going end of life they may be looking at potentially extending the life by refreshing those products. So there are things like that which we still don't know. And we are watching and waiting to see how their product families develop from an extension point of view or new business point of view. So it's harder to predict at this point.

I understand. And then here just on the cash flow and free cash flow, it looks very good for the quarter and you guys raised your free cash flow guidance. Your CapEx guidance I would imagine at this point is that safe to say you're going to be well below what you had previously said of 21 to 24?

Yes, I think we will come in below just because we've --

I mean, yes.

We have pushed out some of the spending until the fourth quarter to help benefit next year.

I see. So, but in terms of your fourth quarter for CapEx, is there any sense for where that would be? Because you're running below 10 so far for the first nine months.

Well, our guidance is showing that we're going to be around $9 million, which will get us to the guidance that we've provided.

For the three. Okay.

Kevin, there are some larger CapEx projects which are underway, around capacity and new product introductions, so that's why Matt is projecting that the fourth quarter would be fairly strong and the total full year will be what he mentioned as new ranges.

Okay. And then, Matt, you have the depreciation and amortization handy in your stock option expense in the quarter?

Yes, I do. The depreciation is $4.6 million. The amortization is $800,000. And the stock option expense was roughly $80,000.

$80,000. And then just the last one for me is on SG&A. Vinod, you talked about 12.5% as being a targeted range that you feel the Company can operate at. How far away are you in terms of achieving that, do you think? Or maybe another way to ask it is at what revenue level do you feel you have to be at to approach those sort of levels?

Now you are beginning to ask me very tough questions, Kevin. We have mentioned in our investor relations presentations that our target is 12.5 to 13% of sales [range]. That's what the slide says. And from a timing point of view, so that you don't pin me down, we had said that the target will be reached in 2008, 2009 time frame. Now you are asking me that what kind of volumes will get me there.

That will help us.

So I'm going to say that by adding another 50 to $75 million in sales, I should be able to leverage my expenses and be in that range.

Right.

That's a guess on my part.

Not a problem. It's a guess on my part too! Anyway, thanks.

Brad Evans, Heartland.

Thanks for taking the question. Just curious with respect to the -- on the EMS side, just -- I know you've got a target out there of a 4 to 5% operating margin. Can you talk about your thoughts as you get out to 2008 and margin improvement on the EMS side?

I think EMS is showing a pretty healthy margin improvement in this quarter if you look at it sequentially or year over year. We've have said in the past that when our operating margins were around 2%, that we said we should be able to very rapidly bring them in a 3, 3.5% range. Beyond 3.5, our target is 4.5, 5%. I should actually say 5% and not 4.5 to 5%. And we have always said that the slope gets steeper once you go beyond 3.5.

However, we do have capacity, manufacturing capacity, in our EMS business, and as we are able to fill that capacity, we should be able to leverage our fixed overhead expenses and that, combined with the mix of the business moving more towards industrial, medical and defense and aerospace markets, we believe should allow us to increase our gross margins and move towards 5%. We have not said the timing for that.

I would suspect in the next couple of years, depending on how rapidly we grow that business and especially change our sales mix, we should be going closer to or be in the 4 to 5% range instead of 3 to 4% range.

If you were to think more globally, just thinking out to 2008 you mentioned new products and new customers, we get the benefit of the lower-cost manufacturing capacity ramping. I know you've brought down the top-line guidance a little bit to 4 to 5%, but how do you feel about the top-line trajectory as you get into 2008?

You know, Brad, we're smack in the middle of our planning process, and we're trying to determine exactly that and we also go through some annual award bids with some electronic OEMs and that is underway. So we will probably need another 30, 40 days before we will be able to give some guidance on the top-line growth range for 2008.

Would it be your expectation that you would hope to improve upon your growth rate in '07 or do you think that you would be happy just kind of maintaining the level we've seen in 2007?

Never happy to maintain what we got. We obviously would be looking for ways to improving things.

So you get the $0.10 benefit of the nonrecurring items on top of, call it modest top-line growth and perhaps some margin expansion, so painting of a reasonably constructive picture for 2008. I realize that we're in a volatile world today, so things can change, but I guess based on the current valuation of the Company, I mean the stock is trading off with the market here today. But the Company is trading at a relatively low level on a multiple of cash flow or debt adjusted cash flow and you've highlighted the free cash generative nature of the business. I guess I just wonder if you could articulate a little bit the debate, the management team the Board has between more aggressively returning capital to shareholders versus making an expensive acquisition that carries with it a lot of risk.

We don't believe in making expensive acquisitions which increase the risk. We are very prudent about how we evaluate acquisitions and the need to be accretive. So I would sure you that if we would have been interested in making expensive acquisitions, we would have done them by now.

The reason it's taking us a little bit longer is we are very careful to make sure that the acquisitions are meeting our strategic needs. So for example, if we look at electronic components, we would be looking at expanding our product range, taking our product to what we call adjacent markets. If we look at EMS, we would be even more selective than Component and Sensors. And we would look at it only if we can increase our penetration into these target markets or we can strengthen our EMS model by adding more to design and development and quick-turn prototyping capabilities. So we have very clearly defined objectives which we have to hit before we do an acquisition.

As far as returning the capital is concerned, as I said earlier, that we are increasing our focus on acquisitions so that we can do small, accretive, tuck-in or bolt-on, whatever you want to call it, acquisitions and we can deliver the returns to the shareholders that way. Matt pointed out that we are looking -- we have done buybacks, so that is another way of increasing our efforts and returning that.

So I believe by looking at the buybacks or looking at the acquisitions and growing our sales, organic sales in the target markets which we had talked about where we are seeing double-digit growth, we feel that we would be able to enhance shareholder value that way.

I'll get back in the queue. Thank you.

Gregory Macosko, Lord Abbett.

Thank you. Could you talk about the HP revenue as that winds down. Is the margin on that the same as the non-HP? How do those two compare?

Gregory, we have never broken out the margins by customers in the past. I would say that obviously EMS margins are lower than the total Company average because Components and Sensors normally carry much higher margins.

Within EMS, HP margins are probably not dramatically different from the total EMS. Having said that, we do believe that medical and industrial and defense and aerospace margins generally tend to be slightly higher than the rest of our EMS business.

So then the addition of four new EMS customers, would we expect just generally speaking on -- with regard to new products and new customers, that those might be shall we say on the higher side as opposed to the lower side of margin expectations?

That's a fair assumption.

Thank you very much.

Thank you. [Garish Nair], Thomas Weisel.

I want to start off with, you had earlier talked about gross margin expansion of 100% -- 100 basis points to about [19.6]%. Was this for the year FY '07 or was this by Q4 '07, by the end of Q4?

That comment I think was our Q3 gross margin versus Q3 of last year.

Okay. And coming to autos, is it possible for you to break out how much of your auto sales is going to U.S. alone?

I can give you probably a very rough estimate. We have in the past talked about the fact that big three autos -- our sales to big three are roughly half of our total auto sales, but some of that actually finds its way outside North America.

Okay.

We would look at it and maybe cycle back to you. I don't have that information handy as to what our sales in U.S. per se.

Okay, sure. And coming to the wireless infrastructure market, how much would Alcatel, Ericsson, and Motorola count? Would it be more than 5% of your sales?

I think those combined would probably be more than 5%, but none of them individually have more than 5% I believe in our components business.

Okay. And 5% -- okay. 5% of overall sales, it's more than 5%, that's what you said --? The three of them combined?

They probably will be. I don't have that, again, handy. We have not looked at it because we don't highlight customers unless they go more than 10% of the total Company's sales. And the only customer we have in that category today is HP. And we have said in the past that Motorola is somewhere between 5 and 10, but that is a combination of components and EMS. And once you go beyond these two, I don't believe we have any customer in the Company which is above 5%.

Okay. And also read about news items saying that Sprint might cut down its WiMAX plants. Would that adversely affect you, considering that Sprint has got a new CEO and he is trying to reduce spending on WiMAX or something like that --? There were rumors or some news articles out there, so.

Yes, I think there were and I'm not aware of any material impact on us. We are continuously watching our positive and negative indicators in the market, which we know that indirectly will affect CTS. And on the positive side, I will give you an example. Motorola's announcement that they announced a contract worth $394 million with China Mobile for GSM network expansion is an example of a positive sign. Alcatel/Lucent has landed a deal I believe to build a nationwide [rule of] WiMAX access network in Russia. That's a positive. But in the same way, the example you gave would be negative kind of a macro market kind of an indicator. We do watch that, or the fact that Ericsson sharply lowered their sales in their projections.

So we looked at those things and we kind of watch those and we find that there are fairly significant positive and negative signals right now in the market, which are probably increasing the uncertainty short term for our electronic components. But we see both ways. We see very positive signals like I mentioned and some negative comments like Sprint.

Okay. Thanks. That's all for me.

Are you ready for another question?

If there is another question. Otherwise, I can finish up with the comments.

(OPERATOR INSTRUCTIONS). Brad Evans, Heartland.

Thanks for taking the follow-up. Could you just discuss preliminary thoughts on capital spending for 2008? Do you see any reason why we should see a material increase in capital spending?

I don't believe so. It should be similar to, at the very least, the guidance that we have and maybe a little bit more.

Okay. I guess just curious, when you think about the end markets, my understanding was with respect to the auto sensors, you feel that that's a low double-digit type of market in terms of growth rates, so call it 12 to 14% type of CAGR. Is that the type of growth rate you still expect to see in that segment of the business?

Brad, if you ask me that question and increase the time horizon to let's say a three-year period, I would feel comfortable with that. It becomes tougher to hit the numbers exactly by year. So some of the [vints] we have gotten recently will not show up in our top line before 2009. And in some cases, 2009 would be a start of the year with mature sales in 2010. So if you ask me that question over a broader time horizon, I probably will be very positive towards that. It becomes a lot harder to predict that kind of an increase on an annual bucket basis.

And would you put the electronic components at roughly 5% over a similar time frame?

The growth rates we have talked about in the past, about electronic components are probably more in the -- we have said single digits, but I would probably say they will be on the higher end of single digits, 7, 8% range.

Okay. And just a more philosophical question I guess, just because I think I've had the chance to ask Don this question in the past so I will throw it to you this time. Considering --

Are you going to remind first what Don said?

I imagine it will be a consistent answer but we will find out. Just thinking about the size of CTS and when you think about management bandwidth and financial resources, do you firmly believe that CTS can be a leader in both the components and sensors markets as well as the EMS business simultaneously?

We look at both these markets and define fairly from a niche point of view, we define the niche areas. You know that EMS, if you go into the consumer side of the industry, you have to be huge. You have to be multi-billion dollar in size. And that's why we have -- our strategy is to be in very niche areas where we can add value and be a Tier 2 where the high mix and medium volumes and special needs become the cornerstone of what you need to do to be successful. Same way in electronic components. We have core competencies and intellectual property in certain areas where we do very well. And so we're trying to focus on those areas where we do very well and we are trying to find more and more synergies between our two segments, whether they are operating synergies by sharing manufacturing facilities all over the world; or whether we find synergies, as I mentioned earlier in response to Kevin's question, around now sitting down with the customers; examples would be Motorola. We serve Motorola from our EMS side and we also serve Motorola on our components side. So looking for synergies from that point of view, to add value.

I guess I just asked the question in the context of this year it looks like return on equity will be about 8.5% or maybe a little bit less than that. So I know you've made some pretty vast improvements from 2004 and we could spend a long time discussing the challenges you face as an organization. But I guess I just -- I think part of the reason the Company remains undervalued is the substandard returns on capital that the Company has been generating. And I think the question needs to be addressed in terms of how do you materially improve your returns on capital to return capital or to return value to shareholders within the context of a stock that hasn't gone anywhere in over 10 years, absent an anomaly in the 2000 time frame? So I mean I think it's a fair question and I would appreciate maybe you're addressing it on the next conference call.

We will do that, but I would -- I would confirm and point out to your comment that starting from 2003, we have steadily improved our return on invested capital every single year and so I would hope that CTS will continue to demonstrate that we can continue to take that forward. We started with 4% and steadily moved up to 8% in '06 and our medium-term target is 12%, and we will continue to move in that direction.

Another way to look at it is your return on capital or return on assets this year will be about 7%. I mean you do have a little bit of debt, so your weighted average cost of capital probably falls somewhere in between 12 and 13%. So I mean you've got call it a 500 to 600 basis point delta between your weighted average cost of capital and what you are earning on your assets.

So it gets back to the heart of my question as to whether the Board has had a very exhausted discussion as to whether shareholders are better off by larger dividends and more aggressive share buybacks. You have demonstrated the ability of the organization to generate free cash flow and it's a valuable resource. I just hesitate -- I'm skeptical as to whether -- we are -- to invest aggressively through acquisition or organically at this point. In an uncertain environment, it makes sense when you have an opportunity to buy a known entity in yourself through a share buyback. So I just think it's the right question to ask and I think you owe it to shareholders to have a very exhausted discussion on that topic. Thank you.

Kevin Kessel, Bear Stearns.

Thanks for taking the follow-up. I just wanted to see if you guys were able to put any sort of ballpark sizes around the new programs that you've won this quarter, the four new EMS's or the three -- I think the three pedal programs -- maybe you can remind us what that was.

The EMS programs were smaller. We have larger EMS wins and smaller EMS wins. I think the EMS wins, I understand, would generate 8 to $10 million in sales in 2008. And the reason we sometimes take these kind of businesses is because we have -- they are normally larger organizations and they start with a smaller program and we have opportunities to perform on those and expand our relationship with those companies.

The pedal program, the three pedal programs would begin to generate mature sales in, again, 2009, 2010 time frame. I believe it's approximately $4 million per year kind of a magnitude business.

So 12 total for three?

No, total.

Four million for the three programs? One million -- a little over a million each?

Right.

Okay. And then 8 to 10 would be for the, roughly, the blended total for the four?

No, 8 to 10 was EMS only.

EMS only but for the four only?

Yes.

And then are there any other customers you are able to discuss outside of the ones that people know well, which are Hewlett and Motorola on the EMS side, especially where you are starting to see the growth from the nontraditional areas offsetting the weakness there?

We are in the middle of discussions with three fairly large opportunities and probably premature for me to comment on that at this time. As we get more clarity, we should be able to announce that.

What about existing customers then that you -- DRS I think is one that you were able to make public but it was small. Are there others that you can make public that are in defense or industrial or medical?

Yes, on EMS, we do business with Medtronics. We do business with -- you mentioned DRS. GE is another customer. From EC point of view, you know we do business with Motorola, we do business with Alcatel kind of people. We do do some business with Ericsson. Alcatel/Lucent is a key customer.

So the names are fairly well-known. We have talked about Philips, Honeywell kind of customers. Haas has been a customer of EMS. On the industrial side we have talked about Cisco. We do business with Cisco.

You do business with Cisco for EMS?

For EC.

Oh, electronic components.

Electronic components. And electronic components, we do business with Cisco, LG, Tellabs, Nortel, Lucent.

All right, Okay. And then I guess my final question here is that the way the guidance looks, for the year, the 4 to 5%, essentially what that implies is that you expect your fourth quarter to be basically flat with the (multiple speakers)

That is correct. Yes.

And I would expect automotive to be bouncing back despite what you are mentioning here just because it's obviously very weak during the summer months. But is that in essence not happening just because of the plant shutdowns or is it coming back but there's other offsets? Or I'm trying to understand the split between EMS and components going into the fourth quarter; do you expect both to be flat? Do you expect one to grow and one not to?

You know, that's a very good question. We get some auto information from CSM, which is one of the two large services and the data we see from them, interestingly enough, suggests that North American light vehicle production in fourth quarter is going to be slightly lower than the production in the third quarter. And the U.S. light vehicle sales are also projected to be lower in the fourth quarter than third quarter. So whether you look at sales or whether you look at production by the OEMs, we are seeing fourth-quarter numbers lower than third quarter, and that is one of the reasons why we are projecting flat fourth quarter compared to third quarter.

I got it. All right. Appreciate it.

At this time we're showing no further questions.

I would like to remind our listeners that a replay of this conference call will be available from 4:15 PM Eastern Daylight Time today through 11:59 PM on Wednesday, October 31st, 2007. The telephone number for the replay is 800-475-6701 or 320-365-3844 if calling from outside the U.S. The access code is 890790. Thank you for joining us today.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.